Study on the Auditing Theory of Socialism with Chinese Characteristics

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Study on the Auditing Theory of Socialism with Chinese Characteristics

Revised Edition

JIAYI LIU

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Copyright © 2015 by John Wiley & Sons, Inc.; The Commercial Press, Ltd.; and China Modern Economic Publishing House. All rights reserved.

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This is a translated work from the original Chinese edition, Study on the Auditing Theory of Socialism with Chinese Characteristics, Revised Edition, Copyright © 2014, The Commercial Press, Ltd.; and China Modern Economic Publishing House.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Liu, Jiayi, 1956- Study on the auditing theory of socialism with Chinese characteristics/Jiayi Liu. — Revised edition. pages cm. — (Wiley corporate F&A series) Includes bibliographical references and index. ISBN 978-1-119-10781-1 (cloth); ISBN 978-1-119-10782-8 (ePub); ISBN 978-1-119-10786-6 (ePDF) 1. Auditing—China. 2. Auditing, Internal—China. I. Title. HF5616.C5L585 2015 657′.450951—dc23

2015007709Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

v

Prologue ix

Acknowledgments xiii

Chapter 1 The Nature of Auditing 1

I. Several Viewpoints on the Nature of Auditing 1II. Understanding the Nature of Government Auditing from the

Perspective of National Governance 6III. Evolution of Government Auditing for National Governance 21IV. Core View of the Nature of Auditing from the National

Governance Perspective 35Bibliography 37Notes 37

Chapter 2 Audit Function 41

I. General Cognition of the Government Audit Function 41II. “Immune System” Function of Government Auditing 43III. Connotation of Audit “Immune System” Function 47IV. Relationship among the Three Major Functions of the

Audit Immune System 55V. Specifi c Embodiment of the Government Audit Function 59Bibliography 68Notes 69

Chapter 3 Research on the Government Audit Objective 71

I. Concept of Government Audit Objectives 71II. Fundamental Objective of Government Auditing 75III. Realistic Objective of Government Auditing 77IV. Primary Task of Government Auditing at the Present Stage 82

Contents

vi ◾ Contents

V. Focus of Government Audit Work at the Present Stage 87Bibliography 90Notes 90

Chapter 4 Research on the Features of Government Auditing 91

I. General Features of Government Auditing 91II. Operating Features of Government Auditing 97III. Work Policy of Government Auditing 105Bibliography 106Note 106

Chapter 5 Audit Modes 107

I. Special Audit Investigation 107II. Real-Time Auditing 120III. Grand Pattern of Financial Auditing 128IV. Unified Organization of a Large-Scale Audit Project 135V. Organizational Mode of Auditing in an IT Environment 148Bibliography 156Notes 156

Chapter 6 Study of Audit Management 159

I. Definition of Audit Management 160II. Principles of Audit Management 167III. Audit Strategy Management 170IV. Audit Plan Management 177V. Audit Quality Management 183

VI. Audit Results Management 193VII. Audit Cost Management 199VIII. Audit Human Resource Management 206

Bibliography 212Notes 214

Chapter 7 Research on Audit Standardization 215

I. Meaning and Significance of Audit Standardization 215II. Audit Standardization Process 218III. System Structure and Main Content of Audit Standardization 224IV. Problems and Affecting Factors in Chinese Audit Standardization 231V. Principle and Way of Chinese Audit Standardization 234Bibliography 239

Contents ◾ vii

Chapter 8 Research on Audit Informatization 241

I. Development Course of State Audit Informatization 242II. Main Forms of Audit Informatization 247III. Future Development Ideas about Audit Informatization 253Bibliography 265Notes 266

Chapter 9 Audit Culture 267

I. Concept and Function of Audit Culture 267II. Core of Audit Culture 271III. Characteristics of Audit Culture 276IV. Audit Cultural Development 281Bibliography 288Notes 288

Index 291

ix

AUDIT THEORY WITH CHINESE SOCIALIST characteristics is a part of the theory of socialism with Chinese characteristics. As an endogenous “immune system” of the general national governance

system, featuring such functions as prevention, exposure, and resistance, gov-ernment auditing serves as the cornerstone and surest guarantee of national governance. Government auditing emerged as demanded by governing activi-ties; the aim of governance of a country determines the orientation of develop-ment of its audit system, and the mode of governance in a country determines the mode of its audit system. In a certain sense, the history of auditing is also a history of the rise and fall of a nation, and of the evolution of national gover-nance. It is also a history that manifests confl icts between different interests, different ideologies, the collision of different cultures, and the evolution of dif-ferent systems. Deeply rooted in the theoretical system featuring distinct Chi-nese characteristics, this book is closely linked to the national political system, economic operations, democracy and the rule of law, the market, history and culture, and the distinct characteristics of the times.

Audit theory with Chinese socialist characteristics is a theory based on auditing practices. Coming from auditing practices, audit theory is the enrich-ment and sublimation of practices and experience. Auditing in China has a history of more than 3,000 years, the auditing system under the leadership of the Chinese Communist Party dates back more than 80 years, and the modern auditing system in China was established over 30 years ago. With the continu-ous evolution of auditing in China, rich practical experience was accumulated. The audit theory with Chinese socialist characteristics was developed by sum-marizing the growth path and laws on the basis of deep analysis of various audit practices. Many viewpoints of the theory have strong Chinese features, imply China’s vein of civilization, and are deeply rooted in Chinese history. The theory will be guiding China’s audit practices for now and the future.

Audit theory with Chinese socialist characteristics is open and inclusive. It not only absorbed the essence of what was achieved by previous generations

Prologue

x ◾ Prologue

through their practice, research, and cognition efforts, but also drew on the experiences and practices of other fields and of the auditing profession of for-eign countries. On the one hand, this book refers to both ancient and modern, Chinese and foreign knowledge in fields of politics, economics, law, and his-tory, as an effort to seek the law of evolution of government auditing from the historical context of social‐economic development. On the other hand, it also summarizes, inducts, and refines the practices, advanced audit theories, and cutting‐edge methodologies from all countries that suit the Chinese reality to form an audit theory system with Chinese socialist characteristics.

Audit theory with Chinese socialist characteristics means advancing with the times. Government auditing in China has been developing for more than 30 years since government audit institutions were established in 1983. While developing this process, auditors nationwide endured great hardship in start-ing a new initiative; worked selflessly, fearlessly, and perseveringly; and showed great loyalty in performing their duties. They independently conducted audit supervision in accordance with the law and played a positive role in ensuring the fundamental interests of the people, promoting democracy and the rule of law, maintaining fiscal and economic order, increasing performance of funds, safeguarding national economic security, combating corruption, and promot-ing deepening of reform. These results would not have been achieved without our efforts of continuous exploration and understanding of government audit work and the effective guidance of audit theory with Chinese socialist charac-teristics. As Friedrich Engels (1820–1895) once said, “Our theory is a theory of development, rather than dogma that has to be learned and mechanically repeated.” This is certainly the case with China’s audit theory, which is still in the process of being enriched and improved.

There is no end to the development of practice and to the innovation of audit theory with Chinese socialist characteristics. Out of this understanding, we worked to summarize our national audit theory in order to meet the grow-ing demands of a new reality and thus have undertaken a revision of the book entitled Study on the Auditing Theory of Socialism with Chinese Characteristics. The revision work features the following three aspects. First, we worked to suit the new demands of the modernization of the national governance system and governance ability and promotion of rule of law in an all‐inclusive manner. Since the 18th CPC National Congress in November 2012, a series of measures have been taken. There have been new developments with regard to guiding theories and governance strategies. In particular, the 2nd, 3rd, and 4th Ple-num of the 18th CPC Central Committee and the circular issued by the State Council—Opinions on Strengthening Audit Work—raised new requirements

Prologue ◾ xi

for government auditing. The latest version of the book aimed primarily at reflecting how government audit theory has been continuously innovated and upgraded to suit the new reality and to better promote and guide audit practices. Second, we analyzed the changes that have taken place in govern-ment auditing practices. We focused on combining theoretical analysis with practical exploration based on enhanced efforts in refinement of audit practices. We presented some new developments of government auditing in China with a view to matching theoretical development with practical development. In this process, new developments in auditing methods, management, standard-ization, and computerization were summarized. Third, we aimed to deepen understanding of the law that governs government auditing. During the revi-sion of the book, while keeping pace with the times, efforts were made to sum-marize the fruits of past research, explain the essence of government auditing and the role it plays as a guarantee of national governance on the basis of the “immune system” theory, provide a deepened understanding of the nature and functions of government auditing, and achieve the modernization of a national governance system.

This book consists of nine chapters; each is an independent study on a specific topic. In order to thoroughly expound each chapter and achieve coher-ence between them, we provided certain theoretical perspectives and practical case studies from different viewpoints to present our readers with qualitative, accurate, and profound content.

Moving from practice to theory is a process in which cognition keeps deep-ening. Theories also require that practice is accurately understood, system-atically summarized, and continuously refined. Based on in‐depth research over a long period, we strived to expound practical experience, common approaches, and the knowledge of our audit practitioners formed in the past years through understandable language. Although we have done our best, we may have omitted some details. We sincerely welcome comments from audi-tors, experts, scholars, and readers so that the theory of government auditing with Chinese socialist characteristics can be continuously enriched, improved, and developed.

December 2014

xiii

S INCE 20 0 9 THE NATIONAL AUDIT OFFICE has been carrying out a thorough study of the audit theory with Chinese socialist characteris-tics in order to better promote the scientifi c development of China’s audit

cause. A research working group was established under the chairmanship of Auditor General Mr. Liu Jiayi. Former deputy auditor generals Mr. Linghu An, Mr. Dong Dasheng, Ms. Yu Xiaoming, and Mr. Hou Kai as well as Deputy Auditor Generals Mr. Sun Baohou, Mr. Chen Chenzhao, and Mr. Yuan Ye and President Mr. Zhai Xigui of the China Audit Society worked as vice chairs and members of the research working group. Other members of the working group include those from the departments of the National Audit Offi ce of China and those from local audit institutions, as well as professors from institutes of higher learning. They include Mr. Liu Dazhu, Mr. Yin Ping, Mr. Wang Xiaolong, Ms. Zuo Min, Mr. Zhang Limin, Mr. Wang Zhiyu, Mr. Hu Limin, Mr. Wang Xiuming, Mr. Chen Taihui, Mr. Cui Zhenlong, Mr. Wang Benqiang, Ms. Guo Caiyun, Mr. Liu Shaotong, and Ms. Liu Liyun. Those involved in writing research reports and carrying out relevant organization work include Mr. Ma Xiaofang, Mr. Lei Da, Mr. Xiao Zhendong, Mr. Zeng Jun, Mr. Niu Hongbin, Mr. Wang Changyou, Mr. Wang Gang, and Mr. Wang Biaohua. The results of their research were used to compile the book titled Audit Theory with Chinese Socialist Characteris-tics , published by the China Modern Economic Publishing House in May 2013.

As a profession with a strong practical feature, facing a rapidly changing external situation and requirements, the government auditing profession is experiencing never‐ending changes and improvements, and audit techniques and methodologies are also developing at a very fast speed. In particular, the 2nd, 3rd, and 4th Plenum of 18th CPC Central Committee and the circular issued by the State Council− Opinions on Strengthening Audit Work —raised new requirements for government auditing, and our understanding about the nature, function, and role of government auditing has deepened. Therefore, we have reviewed and revised the book Audit Theory with Chinese Socialist Charac-teristics. The revision was led by Auditor General Mr. Liu Jiayi, and other leaders

Acknowledgments

xiv ◾ Acknowledgments

of the National Audit Office of China, Mr. Shi Aizhong, Mr. Sun Baohou, Ms. Chen Qiang, Mr. Chen Chenzhao, Mr. Zhang Tong, Mr. Yuan Ye, and Mr. Li Xiaozhong, provided valuable advice and comments in the revision process. Ms. Guo Caiyun, Mr. Shang Rui, Mr. Liu Junmin, Mr. Huang Wenbing, Mr. Chen Xiangjie, Mr. Xu Jun, Mr. Gao Zhan, Ms. Zou Xiaoping, Mr. Zhang Long, Mr. Wang Zhong, Mr. Hao Jingmin, Mr. Wang Gang, Mr. Peng Xinlin, Mr. Liu Dazhu, Mr. Cui Zhenlong, Mr. Wang Biaohua, and Mr. Wang Changyou also contributed important input. We wish to thank all of them.

1

1 CHAPTER ONE

The Nature of Auditing

NATURE IS THE FUNDAMENTAL PROPERT Y and essence of a thing that makes it different. From the perspective of intrinsic property, the nature of auditing provides an understanding of what auditing

is. It is the inherent and relatively stable fundamental property that decides the appearance and evolution of auditing, and is the basic feature that distin-guishes it from other things. From the perspective of extrinsic correlations, the nature of auditing provides an understanding of why auditing is necessary, which sets the starting point of auditing, including its duties, functions, roles, and methods to achieve them.

I. SEVERAL VIEWPOINTS ON THE NATURE OF AUDITING

People’s cognition of things, phenomena, and processes is an infi nite process of understanding leading from phenomena to nature, and from a superfi cial to a profound degree. 1 The cognition of the nature of auditing deepens with the development of audit practice, the further exploration of laws of auditing, and the rising awareness of auditing. Only through in‐depth analysis and research

2 ◾ The Nature of Auditing

of existing cognitions, and by conscientiously summing up and refining audit experience and rules, can we accurately summarize the nature of socialist gov-ernment auditing with Chinese characteristics.

Government auditing as an institutional arrangement was created and developed to meet certain objectives. Due to differing needs, countries have different audit system arrangements at different stages of their socioeconomic development, and the contents, responsibilities, and roles of auditing are also very different. In the early years after the founding of the People’s Republic of China (PRC), independent auditing departments were not set up, and finance, banking, and taxation departments supervised their own revenues and expen-ditures according to their business management situation. The PRC Constitu-tion promulgated in 1982 stipulated a government auditing system, and the establishment of audit offices by the State Council and local people’s govern-ments at county level and above. Over 30 years of development, the government audit system has been improved continuously, and audit guidelines, central tasks, priorities, and roles amid socioeconomic changes have undergone sig-nificant change. Based on different presentations of auditing in different histori-cal periods, thinking on government auditing nature emerged from different perspectives and levels with distinctive characteristics of the times. They can be mainly divided into the following five categories.

(1) Theory of Accounts Checking

According to the Theory of Accounts Checking, auditing simply means the check-ing of accounts. This theory is viewed from the perspective of audit methods/means, with a simple or preliminary conclusion, and an accepted view on the nature of social auditing. This traditional theory is intuitional, visual, easy to understand, and still has great influence. The reasons for the emergence of this theory include: In early periods, most audits focused on checking accounts, and audit means and functions were relatively simple, encouraging a relatively intui-tive approach. In 1953, the Committee on Terminology of the American Institute of Certified Public Accountants (AICPA) offered this definition in Accounting Terminology Announcement No. 1: “Auditing is an inspection means aiming to express views on fairness and consistency of the financial statements provided by a company or other entity to the public and the parties concerned in accor-dance with generally accepted accounting principles.” Encyclopedia Britannica (1974) recorded that “Audit refers to the inspection of business activities, account books and financial statements by accounting experts excluding the accounting personnel originally responsible for preparing the accounts and statements.”

I. Several Viewpoints on the Nature of Auditing ◾ 3

The Theory of Accounts Checking interprets auditing from the perspective of audit means, but can only explain the characteristics of traditional financial auditing and social auditing, and cannot conform to the requirements of gov-ernment auditing. For example, performance auditing, accountability audit-ing, resources and environmental auditing, and real‐time auditing on policy implementation cannot be described as “checking accounts.” Due to the long‐term influence of the Theory of Accounts Checking, government auditing was positioned as “detecting errors and correcting disadvantages.” The Theory of Accounts Checking advocated that government auditing institutions mainly function to rectify financial accounting and economic activities, while ignoring the roles of government auditing in socioeconomic development, the nation’s political and legal system construction, and national governance.

(2) Economic Supervision Theory

According to the Economic Supervision Theory, the main idea of government auditing is as follows:

The trusted economic responsibility relationship generated by the sepa-ration of ownership from the right of operation and management is the basis of auditing. It was developed for the owners to supervise the trusted economic responsibility performance situation of operators and managers. Auditing is an economic supervision activity carried out to evaluate, confirm and prove whether trusted operators and managers have properly performed their assigned economic responsibilities.2

Economic Supervision Theory was widely recognized by Chinese auditors in the 1980s–1990s. A national seminar on basic audit theories in 1989 pro-posed that auditing was the independent economic supervision activity carried out by a professional agency and its personnel in accordance with the laws to review the truthfulness, compliance, and performance in regard to financial status, financial revenue and expenditure, and relevant economic activities of audited units, and evaluate economic responsibilities, so as to maintain the financial laws and discipline, improve management and economic returns, and strengthen macrocontrol. The National Seminar on Audit Definition in 1995 further clarified: Auditing is an act of independently checking accounting records and supervising truthfulness, compliance, and performance of finan-cial revenues. The two definitions, with profound impact on auditing theory and practice, were proposed from the viewpoint that economic supervision is the nature of auditing.

4 ◾ The Nature of Auditing

Defining the nature of government auditing as economic supervision and stressing its important role in the economic field, its supervision functions, the focus on specific economic behavior, and the detection of major violations of laws and regulations fulfilled the audit environment requirements and actual conditions of auditing offices in the early years, and played an active role in helping people understand and accept auditing. However, with economic and social development, Chinese audit practice has undergone significant change. Especially in recent years, government auditing has played an active and constructive role in political, economic, cultural, social, and ecological con-struction, as well as all other socioeconomic aspects. However, the Economic Supervision Theory cannot be used to explain changes of audit practices and their constructive role any longer.

(3) Economic Cybernetics

According to Economic Cybernetics, government auditing is an economic con-trol activity.3 Its main idea is as follows: Auditing was developed based on the trusted economic responsibility relationship. Upon starting a project for a client, auditors directly seek audit problems and determine any punishment, and report the accountability performance situation back to the client with judgment on the necessity of “correction,” which brings into play the important role of infor-mation in system operation control. Therefore, auditing, especially government auditing, is a control mechanism ensuring accountability performance.

Economic Cybernetics stresses that auditing is part of the control mecha-nism for ensuring effective accountability performance. Its abstract description of direct correction by the audit office is in line with the actual situation of government auditing. There is widespread belief that control includes supervi-sion. Supervision, in fact, is only an element of control. Although the objects of control and supervision are both information, the actors differ in attitude. Control is positive, while supervision is relatively passive and serves the overall control purpose. Therefore, compared to Economic Supervision Theory, Eco-nomic Cybernetics has richer content.4

Economic Cybernetics was proposed on the basis of recognizing that audit-ing is supervisory behavior, and summarizes the nature of auditing from the perspective of its direct role. Both it and Economic Supervision Theory empha-size the important role of government auditing in economics, and the focus on specific economic activities and economic matters, while ignoring its important role in the political, cultural, social, and environmental construction, as well as the macrofield.

I. Several Viewpoints on the Nature of Auditing ◾ 5

(4) Power Restriction Theory

The Power Restriction Theory derives from a concept in The Spirit of Law, writ-ten by French thinker Montesquieu in the eighteenth century: “All powerful men are likely to abuse the power and will not stop until being restricted . . . To prevent the abuse, power must be restricted by power.”5 According to this viewpoint, we can conclude that government auditing, through supervision of management and use of public resources during the exercise of government powers, ultimately aims to control government power and prevent corruption and power abuse. After auditing the responsibility performance of adminis-trative organs, government audit offices report the results to legislative bodies for possible further investigation. In fact, government auditing is the means and the mechanism for checks and balances between legislative and executive power. If audit supervision is regarded as a power, auditing by government audit offices is a process of restricting one power with another.

The Power Restriction Theory breaks the limitations of the Economic Supervision Theory and Economic Cybernetics concerning positioning in the economics field, and summarizes the nature of government auditing from the perspective of political science. It determines the nature of government auditing as power restriction, and stresses that auditing, as a power restriction tool, is a political system arrangement mainly used to restrict and prevent power abuse and corruption. This theory plays an active role in establishing the government audit theory from a political perspective, and guiding auditors to widen audit work to the political and social perspectives rather than merely the economic perspective.

However, the Power Restriction Theory was not unanimously accepted. Some scholars argued that it stressed the restrictive role of auditing, while giv-ing insufficient attention to the constructive role of government auditing in promoting more effective exercise of powers. Others believed it still could not reasonably explain the design and implementation of the government audit system of administrative organs.

(5) Theory of Democracy and Rule of Law

According to this, modern government auditing is a product of democracy and rule of law, and also a tool for promoting these concepts.6 Democracy and the rule of law are the basis of national governance. From the perspective of audit origin and development, an independent government audit system cannot operate well without sound rule of law. Of major importance is the safeguard-ing of independence, providing audit evidence and standards, and maintaining

6 ◾ The Nature of Auditing

the effi ciency and authority of audit results. The theory stresses that modern auditing is a means of promoting democracy and the rule of law mainly due to three aspects: Government auditing comes from and acts on behalf of the laws. In many countries, audit status is established constitutionally. Modern government auditing plays an active role in advancing the rule of law and safeguarding its dignity: (1) supervising the enforcement of fi nancial laws and regulations, to maintain the solemnity of the law; (2) urging administration by law; and (3) revealing problems through auditing to improve laws and regula-tions. Furthermore, government auditing is derived from and serves people’s democracy. Upon entrustment by the power organs, government audit agen-cies, on behalf of the masses and taxpayers, supervise government responsibil-ity performance and report to the people. Therefore, government auditing is a tool for promoting democracy. Finally, as a tool for democracy and the rule of law, it is fully constructive. Democracy and the rule of law are complemen-tary and inseparable. We should balance the interests of individuals, groups, and the whole society and build a harmonious society and avoid overly rigid law enforcement. Otherwise, true democracy cannot be achieved. Therefore, government audit offi ces should conduct regular fi nancial auditing, supervise government departments and state‐owned enterprises, broaden their horizons, refl ect more public appeal, and pay more attention to people’s fundamental interests. From this perspective, government auditing as a tool for promoting democracy and rule of law is active, creative, and constructive.

Compared to the Power Restriction Theory, the Theory of Democracy and Rule of Law expounds the relationship between government auditing and democracy from the political perspective, and also the relationship between government auditing and the rule of law from the perspective of establishing a law‐based country. It emphasizes the supervisory and restrictive role of gov-ernment auditing, and also the promotional aspect. Therefore, this theory is an abstraction and generalization of government auditing as an institutional arrangement from a higher level and a wider range.

II. UNDERSTANDING THE NATURE OF GOVERNMENT AUDITING FROM THE PERSPECTIVE OF NATIONAL GOVERNANCE

The foregoing analysis shows that recognition of the nature of government auditing is a gradual process, with certain characteristics of the times and his-tory. But most fundamentally, we should constantly and promptly adapt to

II. Understanding the Nature of Government Auditing ◾ 7

social changes and try to reveal the laws behind social phenomena, to maintain the vitality and creativity of government auditing. Engels said, “The theoreti-cal thinking of every era, including the present, has historic characteristics. In different ages, it has completely different forms and contents.”7 Currently, to address a series of challenges including economic globalization, technology development, and diversification of public demands, all countries highlight improvement of national governance to seize opportunities and meet chal-lenges. Against such a background, an important requirement for government audit theory and practice was to understand the nature and positioning of gov-ernment auditing based on national governance needs so as to guide scientific development of the government audit cause.

The word “governance” is derived from Latin and ancient Greek, originally meaning control, guidance, and manipulation.8 For a long time, “governance” and “government” were used interchangeably for management and political activities in regard to national public affairs. In the late 1970s, with major economic and social transformation underway, governance theories attracted extensive attention from social scientists, and countries everywhere launched governance‐based reforms. Governance extensively involves “each social orga-nization and institution including the family and the State,” and stresses “three important governance departments directly related to sustainable human development, namely the State (governmental organizations and institutions), civil social organizations and private sectors.”9 Western and Chinese scholars and research institutions have different understandings about the governance concept and connotation, however. After studies, we define governance as the process of controlling and managing state affairs and social affairs and pro-viding services by configuring and exercising state powers, so as to ensure national security, safeguard national interests and people’s interests, maintain social stability, and promote scientific development. The core idea about the nature of government auditing from the perspective of national governance can be summarized as follows: Government auditing was generated and improved to meet national governance needs, and serves as an “immune system” for national governance, as well as the cornerstone of national governance and an important assurance for promoting modernization of national governance.

(1) Government Auditing Improved to Meet National Governance Needs

This cognition is mainly based on the Marxist theory of state in political science. It expounds the definition and nature of the state mainly from three aspects:

8 ◾ The Nature of Auditing

1. Theory on the Origin and Nature of the State. The first is the tool the-ory. In the Critique of Hegel’s Philosophy of Right, Marx revealed the origin of the state from the perspective of the relationship between the state and civil society. He proposed that: “The State did not exist intrinsically . . . As the economy developed to a certain stage, society inevitably became frag-mented into classes, thus contributing to the establishment of States.”10 That is to say, conflicts among various interest groups contributed to the emergence of the state, which became a tool of maintaining class rule. The second is the arbitrator role theory. Engels commented on Marx’s view on the origin and nature of state as follows: “The origin of the State is as follows: society was trapped in unsolvable self‐contradictions. . . To avoid the elimination of the opposite classes and society in the meaningless con-flicts, a force superficially superior to the society should be generated. This force should be able to ease conflicts and keep conflicts within an orderly range. This force, that comes from society but is superior to society, and increasingly separate from it, is called ‘the State.’”11 That is to say, the state as a superficial mediator can help mutually conflicting classes achieve a temporary balance in special periods and becomes the basis for avoiding social breakdown or disintegration.

2. Theory on the Relationship between Economic Base and Super-structure. In The German Ideology, Marx said that “civil society always marks the social organization developed directly from production and communication. Such social organization always constitutes the basis of the State and any other conceptual superstructure.”12 Marx also believed that “a personal material life that does not change with personal will, i.e., a mutually restricted production mode and communication mode, are the realistic basis of the State, and does not change with personal will on the basis of division of labor and private ownership. These realistic relation-ships are not created by State power, but are the forces of creating State power.”13 That is to say, the state as part of the superstructure is decided by economic fundamentals.

3. Theory on State Functions and Alienation. Marx believed that the state functions “cover all kinds of social public affairs, and also include all special functions to address the contradictions between the government and the people.”14 That is to say, the state functions to maintain the rul-ing authority and force opponents to surrender, and also undertakes the public mission of social management and cultural education. According to the social development process, national governance functions will gradu-ally shrink, while public affairs management functions gradually expand.

II. Understanding the Nature of Government Auditing ◾ 9

However, state functions, especially public affairs management functions, are often alienated because some ruling classes pursue their own interests. In that case, the state becomes a tool for some classes to pursue their own interests rather than the inherent general interests of a civil society. “For some bureaucrats, the State becomes a tool to achieve their own purpose, win promotion and get rich.”15 Marx criticized Hegel’s view that an “inter-nal hierarchy supervision system of bureaucracy can prevent the abuse of State power,” thinking that depending solely on internal supervision is a self‐deception. To prevent this situation, we must break the mystique and monopoly of state power based on the principle of political openness, and conduct effective external supervision on the basis of democracy.

According to the State Theory of Marx, during the evolution and devel-opment of the state, various state powers must be balanced and restrained mutually, healthy running of the state must be supported in finance, policy, and law, and so on; to avoid alienation of the state into a tool for some classes to seek their own interests and prevent abuse of state powers, we must create a state power configuration of mutual checks and balances through effective national governance. In the power allocation process, the state, on behalf of people, authorizes some public authorities and persons in power to allocate, manage, and use the public resources, public finances, and public assets, and also legally authorizes some independent organs to supervise the exercise of public power through various ways, especially government auditing. In terms of the origin and significance of auditing, “the government only cared about accounting revenues and expenditures and collecting taxes in the beginning. To this end, the government adopted control means including auditing, to reduce errors and malpractices caused by the incompetence or fraud of officials.”16 This can be fully verified by the origin of the state.

In the beginning, the state developed from the clan society had a small scale and single functions, and was established on the basis of original democ-racy; government officials were elected by the citizens, mainly to safeguard national territorial security, social order, and stability. Because of low produc-tivity, the fiscal revenue from citizens had to be kept at a relatively low level as much as possible, and government officials received more direct supervi-sion. Government officials’ compliance with the social and moral standards is a decisive factor of judging the law enforcement legitimacy of government (officials). As a result, systems like the property audit system of Athenian soci-ety were established. Under such systems, any officer whose embezzlement was established after auditing of his properties when he came into office and when

10 ◾ The Nature of Auditing

he left office would be severely punished.17 At that time, each citizen could be elected as a government official, so everyone might be audited. The implementa-tion of the official property audit system meant total lack of public tolerance for the embezzlement of public properties. This system helped prevent the abuse of limited government revenues, improved national governance, and eased con-tradictions between government officials and resource providers.

With the development of social productive forces, the state gradually expanded in scale. The further social division of labor resulted in the further differentiation of social class, government bureaucracy gradually formed, and government officials gradually became independent interest groups. Social classes providing financial sources, through financial auditing as a control tool, minimized the economic costs to maintain the running of state apparatus, and urged government officials and even the rulers to perform their responsibili-ties in accordance with certain code of conduct. Auditing became a necessity for the government to win the trust of the ruling class and obtain needed financial sources.

With the further expansion of the state scale, the highly centralized feudal bureaucracy system was formed. Conceptually, the emperor had the supreme power in every aspect. More complex principal‐agent relationships existed between the royal family and government bureaucrats at all levels. To maintain the normal running of the state apparatus, the emperor effectively restricted government bureaucracy behavior at all levels through auditing, and required them to provide real data on payable taxes, so as to obtain necessary revenues and safeguard financial security.

With the success of capitalist revolution and the continuous improvement of productivity due to scientific and technological development, democracy became an increasingly important basis for the legitimacy of governance. Meanwhile, two world wars and the continuing economic crisis meant state scope and functions expanded continuously, and public resources obtained, dominated, and used by the state increased continuously. Although taxpaying is the obligation of every citizen, an ever‐increasing tax burden created a public demand for government to control expenditures. In this period, government auditing became a direct means to control government expenditures and ensure reasonable exercise of power, and played a crucial role in ensuring the normal running of the state apparatus.

The process of state development shows that generation and improvement of government auditing derived from national governance, national gover-nance needs determine the generation of government auditing, and national governance objectives determine the direction of government auditing. Under specific historical conditions, government auditing followed its own internal

II. Understanding the Nature of Government Auditing ◾ 11

law, and its objectives, tasks, priorities, and methods changed with those of national governance. Government auditing always plays an irreplaceable role in national governance.

(2) Government Auditing as an “Immune System” for National Governance

This is mainly based on the system theory. “System” came from ancient Greek, with the connotation of “being combined, integrated, and orderly.” Ludwig von Bertalanffy (1901–1972), the founder of modern system theory, thought that “system is the whole of various components correlated and related to the environment”; the Modern Chinese Dictionary explains that “system is the whole of similar things with certain correlation.” The Encyclopedia of China defines sys-tem as “the organic whole of interactional elements”; American system man-agement master Fremont E. Kast argued that “system is an organic and entire unit which is clearly different from other systems and composed of at least two interdependent parts, components or subsystems.”18 According to these defini-tions, system should have four basic meanings: It consists of several interrelated elements, it has a common goal, it is an organic whole made up of several ele-ments, and it always has a certain relationship with the environment.

According to the requirements of system theory, the state is a large system. Regardless of any difference in national governance system and mode, the core of governance always lies in the effective allocation and exercise of public power, and different organs should respectively undertake the duties of decision mak-ing, execution, and supervision, mutually communicate, interact, and depend on each other to jointly maintain the healthy development of the economy and society. Among them, the decision‐making organs mainly function to analyze and process information according to national governance goals, make, opti-mize, and assess feasible plans, coordinate and control the decision‐ making process, and make final decisions; the executive organs mainly function to accurately execute decisions and achieve decision‐making goals and tasks; and supervision and control organs mainly function to supervise the execu-tive system in decision execution, feedback the assessment situation to the deci-sion‐making system, urge the timely decision amendment, and put forward the suggestions on reward and punishment. Government auditing belongs to the scope of supervision and control, serves the decision‐making organs of national governance, and plays the role of supervising and restraining the organs of executing national governance. If national governance is compared to the life system, government auditing can be called an “immune system” because the

12 ◾ The Nature of Auditing

role and action mechanism of government auditing are highly similar to those of a body’s “immune system.” In other words, government auditing can help to detect the risks of affecting economic and social development, reveal potential hazards, prevent such risks with statutory powers, coordinate various forces in a timely way, and suggest to governments or appropriate authorities ways to avoid risks with a variety of resources, so as to improve the “immunity” of the whole national system, promote the harmonious development of society as a whole, and achieve and maintain balance.

From the perspective of auditing functions and role, and economic and social development needs, the cognition of government auditing as an “immune system” expounds the definition, reasons, functions, and role of auditing. The operational mechanism and functions of auditing as the “immune system” will be discussed later.

(3) Government Auditing Is a Cornerstone and Important Assurance of National Governance

Based on the previous two judgments, this cognition reflects in‐depth thinking on the nature and functions of government auditing from the perspective of national governance modernization, government audit institutional property, legal status, functions, and role. Generally speaking, “cornerstone” refers to the stone that plays a vital role in a building’s foundation, and is often compared to the support base or backbone. It has such basic characteristics as stability, sufficient bearing capacity, and deformation and variation resistance. As the cornerstone and important assurance of national governance, government auditing can be interpreted from the following aspects:

▪ Fundamental institutional arrangement ▪ Important force to enhance national governance capacity ▪ Important assurance of governance modernization

(a) Government Auditing: Fundamental Institutional Arrangement19

The national governance system consists of a range of institutional arrange-ments to standardize the exercise of power and maintain public order. Manag-ing economic and social affairs through systemic application is an important feature and essential requirement for modern governance. Government audit-ing is also a system of national governance, and an institutional property; the role of government auditing determines its status as the cornerstone and impor-tant assurance for national governance.

II. Understanding the Nature of Government Auditing ◾ 13

First, government auditing is an important link in the governance mecha-nism of checks and balances contributing to basic national stability. Political science studies show that the relationship between power and right is a funda-mental issue concerning national governance.20 To better deal with the rela-tionship, we should follow Chinese Premier Li Keqiang’s requirement: “Power cannot be exercised without legal authorization; a right not prohibited by law can be exercised.” That is to say, we should protect and maintain “rights,” while restricting and supervising “power.” National activities and governance are inseparable from allocation and exercise of public powers. Generally speaking, for better power allocation, we should follow the basic principle of checks and balances, matching powers to responsibilities, democracy, and the rule of law, in order to form a power structure and operating mechanism under which powers of decision making, execution, and supervision interact and become coordinated, and ensure a match between powers and responsibilities, and power supervision. Government auditing belongs to the scope of supervision and control, serving the decision‐making organs and playing a role of supervis-ing and restraining the executive organs. Government auditing is an important aspect of the power checks and balances, mainly in that it ensures the good running of the state through supervision and control, and information feed-back. In history, national supervision activities, including government audit-ing, were first carried out almost simultaneously with the emergence of the state, laying an important foundation for it to function. The functions and role of government auditing, and the government audit system established on this basis, are decided by the national political system. In other words, the govern-ment audit system will always adapt to the national political system, and have obvious high stability.

Second, government auditing is an institutional arrangement made in accordance with the fundamental Constitution, which reflects its stability, coerciveness, and authority. “A country will be governed well if decrees can be enforced well; otherwise, a country will fall into chaos.”21 Rule of law is national governance conducted in accordance with the law, and is the impor-tant assurance for its continuous development. Government auditing is the cornerstone of national governance judged from three main aspects: Func-tions and status of government auditing are determined by the Constitution. Most countries endow government auditing with transcendent constitutional status. Furthermore, government auditing is an important embodiment of the spirit of the rule of law, and an important carrier of governance and admin-istration by law. It is an integral part of the national legal system. Power to supervise through auditing is determined in the Constitution, and the basis,

14 ◾ The Nature of Auditing

procedures, and standards for auditing are mandatory. We must adhere to objective and impartial auditing according to law; audit law construction is an important part of the national legal system construction. In history, countries whose audit activities played a strong role produced a relatively high degree of rule of law and governance. Finally, government auditing should play its due role for maintaining and promoting the rule of law. By supervising enforce-ment of laws and regulations, audit offices strictly investigate and deal with financial violations, safeguarding the authority and dignity of the laws and ensuring law‐based socioeconomic development; through in‐depth analysis of vulnerabilities and problems concerning the implementation of existing laws and regulations, audit offices seek to improve the legal system. Therefore, gov-ernment auditing is a basic system with a solid legal basis—statutory, stable, and long‐term.

Third, government auditing is an endogenous “immune system” for the healthy operation of national governance,22 and can prevent abuse of power and governance failure, which reflects its features of resistance to variation and deformation. First, it is the result of endogenous evolution of national governance. “National governance demands determine the generation of government audit, national governance objectives determine the direction of government audit, and the national governance mode determines the system and form of government audit.”23 Government auditing exists in all national governance systems and mechanisms, and provides an important basis for establishing complete, scientific, standard, and effective systems and mecha-nisms. Second, government audit offices, through tracking and supervision to ensure no overuse of public funds and public powers, can prevent abuse of power, detect anomalies in policy and decision implementation in a timely manner, provide objective, detailed, and reliable information for decision‐making departments, ensure decisions and deployment interact in policy orientation, implementation, and actual effect, and maximize the integrated role and effect of governance. Third, government auditing can enhance the “immunity” of the national governance system. With unique functions of “prevention, revealing, and resisting,” government auditing can detect and prevent economic and social risks, reflect the real situation and reveal existing problems, and protect against various kinds of economic and social “diseases” by standardizing and improving systems, mechanisms, and institutions that promote the all‐round, coordinated, and sustainable development of economy and society.24

Therefore, government auditing is a basic system for national governance, and one of the cornerstones for ensuring normal operation. Government